[BillPaay]

which will undermine USDJPY and other JPY crosses further. Declining US bond yields and the related flattening of the US yield curve suggests that the risk premium in the US bond market is declining. In spring when the US switched from credit easing towards quantitative easing the US bond market built up a risk premium with the yield increase, which at that time was entirely driven by rinsing inflation expectations. Central bank accounts went on a buyers strike, but now that the US have defined its exit strategy from quantitative easing, official accounts have come back into the market bidding up bonds. The JPY yield curve has remained relatively steep causing a shift in the behaviour. Instead of using the strength of their balance sheets to lend to non-Japanese accounts, Japanese banks have increased buying of domestic securities.

The more the JPY yield curve steepens on a relative basis the higher the incentive for Japanese banks and other portfolio managers to invest in domestic securities providing JPY support. Additional JPY strength is expected via the restructuring of the ‘global liability book’. For more than a full decade the JPY was the main funding currency for global carry traders. Now there are a handful of other currencies providing funds at near zero costs. The ‘optimisation’ of the JPY funding book will see the relative weight of the JPY as the main funding currency falling while the EUR, JPY, CHF, SEK and the CAD will be used more for funding purposes when compared to the past. Reports that the DPJ may win a 2/3 majority and Japanese companies repatriating profits on tax free dividends provide a very convincing JPY bullish argument.